With the rapid changes in international climate change policies, in order to assess the possible risk impacts under different low-carbon transformation pathways and to fulfill TCFD’s mission of exposing the financial impacts associated with climate change, Chailease Holding has collaborated with an external consultant to not only identify the significance of climate change risk opportunities, but also to further perform scenario analyses to understand the possible impacts on our operations and supply chain under different scenarios, and to assess the resilience of Chailease Holding against climate risk.
In 2024, Chailease Holding conducted a scenario analysis of key reasonably quantifiable risks, as well as a wide range of potential climate scenarios, selecting scenarios with different future pathways to gain a deeper understanding of the range of climate-related risks and opportunities that may be encountered over time, in order to assess the likely severity of these risks.
The assessment of transition risk is based on the parameters of climate change scenarios published by the Network for Greening the Financial System (NGFS), a network of central banks and financial regulators around the world, and the selection of scenarios includes Current Policies, NDCs, and Net Zero. 2050. The World Energy Outlook 2024 scenarios published by the International Energy Agency (IEA) were also used to analyze the exposure to carbon emissions, and the scenarios selected included STEPS, APS, and NZE 2050.
Risks of Transformation－Supplier carbon cost shifting
Analysis results:
According to current government regulations, none of our suppliers is subject to carbon fees, so there is no risk of cost shifting due to the imposition of carbon fees. However, considering that the government could adopt a comprehensive carbon levy in the future, we identified a total of 18 key suppliers of modules and inverters for solar power plants procured by Chailease Energy in 2024 and estimate that carbon emissions of the products provided by the suppliers would be approximately 5,149 tons based on the industrial carbon emission coefficients. Due to the advancement of PV process technology, the carbon footprint of the raw materials for the same installation capacity could continue to decrease as technology develops. The company estimates that if the 2023 build-out scale is maintained, the carbon pass-through cost for each scenario in 2030 and 2050 will range from NT$620,000 to NT$930,000.
#Uncertainty Explanation:
- Carbon Fee Amount: Carbon fees are estimated at NT$300, and future changes in carbon fees are subject to uncertainty.
- Target of Carbon Fee Levies: Scenario analysis assumes that carbon fees will be user-paid, but it is not clear with current government policies that all sectors will be covered and there is a minimum allowable emission level, so it is still uncertain as to whether it will be user-paid in the future.
- GHG Emissions: Supplier emissions are estimated by the EEIO based on the amount of purchases and the actual greenhouse gas emissions are subject to uncertainty.
Risks of Transformation－Corporate Financing Credit Carbon-risk Exposure
Analysis results:
Every year inventory of investment and financing data (including equity investment, corporate bonds, general corporate credit, and auto loans) of Chailease Finance, FFTC, Chailease Auto, Chailease International Finance Corporation, and Chailease Vietnam, subsidiaries of the Company. The total number of companies that meet the criteria for analysis is 898 according to the five major high-carbon emission industries identified by Chalease in 2024. The company’s corporate clients’ carbon exposure is mainly in the cement industry and the steel industry, with the steel industry being the key exposure industry in scenario 1. As the Company's credit customers are mainly located in Taiwan and China , in scenarios 2 and 3, due to policy changes in China, the carbon price began to grow rapidly, so the company’s exposure to the cement industry showed a significant growth in line with the changes in the carbon price and carbon reduction scenarios.
The impact of carbon exposure on a company is classified into three levels: low, medium, and high according to the expected carbon emission costs and annual operating income of each company. In Scenario 1, the carbon reduction path is not demanding and the carbon price is relatively low, so all companies are in the low impact category. In Scenario 2, the carbon price in the PRC will increase significantly after 2030; and therefore, some companies start to experience medium impact. In the highly transformative scenario 3, due to the carbon reduction path and a significant increase in carbon price, nearly 12.9% of the high carbon emission companies will experience medium impact and no high impact in 2030. However, by 2050, an estimated 8.1% of these companies will face medium impact, while 81.3% will be subject to high impact.
The Company will require that future corporate clients should prioritize assessment of the carbon intensity of their greenhouse gas emissions. High-carbon emitters will be required to propose reasonable carbon reduction plans. In the future, the Company will estimate to spend NT$2.15 million to cooperate with external agencies to gradually assist high carbon emission companies to transition, save energy and reduce carbon emissions, so as to continuously reduce Financial Carbon Exposure to Carbon- Related Assets at the Company.
Illustration of uncertainty:
- The amount of carbon fee: The carbon fee is estimated according to the parameters set by scenario analysis, and change of carbon fee in the future is uncertain.
- Targets of carbon fees: Scenario analysis assumes that the carbon fee is paid by users, but the policy does not yet clearly list all industries and set a minimum allowable emissions, so it is uncertain whether customers are subject to collection.
- GHG Emissions: Customers' emissions are estimated in EEIO based on revenue amounts, and the actual amount of greenhouse gas emissions is uncertain.
Physical Risk－Solar power plant flooding potential analysis
Analysis results:
In 2024, the Company has completed grid connection for a total of 3,851 solar power plants, of which 530 are ground-mounted (including floating) solar power installations. We analyzed the flooding risk of solar plants located in villages/towns/cities/districts under SSP1-2.6 and SSP5-8.5 scenarios, and the simulation data classified the flooding hazard and vulnerability into five levels. The areas with hazard × vulnerability ≥ 20 were defined as high risk areas; The areas with hazard × vulnerability ≤ 6 were defined as low-risk zones; values falling between these thresholds are categorized as medium-risk zones. After comparing with the Company’s photovoltaic sites, there are 193 power plants located in high-risk areas under the SSP5-8.5 scenario, with a total installation capacity of approximately 165,300 kW and a total exposure value of approximately NT$7.4 billion. Under the SSP1-2.6 scenario, there is 5 power plants in the high-risk area with a total installation capacity of approximately 646.43 kW and a total exposure value of approximately NT$29.09 million.
In order to ensure the supply of suppliers, the company also conducts risk impact assessments on suppliers. A total of 8 suppliers were evaluated to be located in high-risk areas under the SSP5-8.5 scenario, accounting for approximately 64.11% of the total procurement value. Only one supplier are located in high-risk areas under the SSP1-2.6 scenario, accounting for approximately 1.19% of the total procurement value. Suppliers are highly replaceable and can we immediately find alternative suppliers in case of a related climate disaster.
In order to reduce the impact of climate risk hazards, all site locations have been adjusted in advance to meet the safest and most flood-resistant engineering options to ensure that even under the most severe climate conditions risk control requirements can be met. Relevant evaluation criteria have been incorporated into the Company’s internal regulations. All sites located on hillsides must pass a soil and water conservation assessment and be reviewed by competent authorities before being built. Site surveys and engineering opinions are required before the construction of a project. The Board of Examiners shall examine the information obtained from the current survey documents and the disaster potential map of the National Science and Technology Center for Disaster Reduction to ensure that site operations will not be affected by abnormal weather.
However, considering that the occurrence of flooding/slope disasters may still cause damage to some panels of the power plant, broken cables and other impacts, which in turn generate related maintenance costs. The estimated impact of flooding risk under SSP5-8.5 scenario is approximately NT$78.62 million. The impact of flooding risk under SSP1-2.6 scenario is approximately NT$320,000. In addition, in order to effectively transfer the impact of climate change disaster risk, the Company has taken out product insurance for each power plant and will be compensated 80% of any losses caused by disasters. Under the SSP5-8.5 scenario, the estimated annual insurance premium for power plants located in high-risk areas is approximately NT$22 million.
# Uncertainty Explanation:
- Risk Levels: Risk ratings are based on the relative ratings provided by NCDR and the actual risk likelihood is subject to uncertainty.
- Maintenance Costs: Risk shocks might not occur in all areas at the same time, and impact shocks are only empirical ratios, with actual maintenance costs being uncertain.
Physical Risk－Collateral Flooding Potential Analysis
Analysis results:
The Company reviews the financing cases with physical collateral annually. In 2024, there were 88 financing cases with physical collaterals, and the total loan balance reached NT$4.552 billion. We analyzed the flooding risk of each collateral under base year, SSP1-2.6, SSP5-8.5 scenarios in various villages/towns/cities/areas. The simulations classified the hazard and vulnerability of flooding into five levels and estimated the asset impairment ratio based on the hazard x vulnerability level. Considering that the current valuation results of physical collateral have reflected the climate risk in the base period, cases in which the risk rating has not changed as a result of the simulation are deemed to have no collateral impairment due to climate shocks. A total of 52 loans under the SSP5-8.5 scenario were assessed to have insufficient guarantee ratio due to asset impairment, with the exposure amount accounting for approximately 4.65%of the total loan balance. Under the SSP1-2.6 scenario, there were 52 loans with insufficient guarantee ratio due to asset impairment, and the exposure amount accounted for approximately 3.96%of the total loan balance.
The Company has incorporated a physical risk factor into its financing evaluation. If the real estate collateral is located in a disaster-prone area, the value of the collateral will be discounted or not even provided. The financial impact on customers and the related derivative risk will be evaluated when there is an actual significant loss of the subject matter or collateral due to a natural disaster.
Illustration of uncertainty:
- Risk classification: The risk rating is based on the relative classification provided by the NCDR, and the actual risk possibility is uncertain.
- The amount of exposure is estimated according to the risk level in proportion to the asset impairment, and the actual amount of risk impairment is uncertain.
